Banks' tier-one calling convention set to change, says IlliquidX
In research published today, independent financial services boutique IlliquidX says that weakness in bank capitalisation means that the traditional certainty around tier-one paper being called is set to change. Monte dei Paschi di Siena’s decision not to call two of its tier-one bonds callable in February (7.99%) and March (FRN) – for a total of €430 million – is testimony to a new, more logical trend, says IlliquidX.
The previous market-wide convention was that a bank would always call its tier one at the expected call date, no matter what the economic conditions. It was widely believed that if a bank did not, it would not be able to come back to market issuing tier-one or other callable capital ever again. When not called, a tier-one bond becomes perpetual, at the closest level to equity, and the last real difference between the two is a regular (and higher than previously) coupon versus an uncertain dividend.
However, argues IlliquidX, economically rational decisions should now prevail over relying intangible or difficult to value features. As such, investors should expect that not all tier ones will be called, given the regulatory uncertainties and cost of refinancing on the wholesale markets. The new spread of the Monte dei Paschi bonds becomes 630bps over Libor post their call dates.
It is unlikely that investors would ‘enjoy’ the higher yield, given that the bank increases its interest servicing cost by having the bond outstanding and in a weak economic environment this could be a downward spiral. But leaving the existing tier one outstanding could also be a rational trade-off to issuing a new one on the market at higher levels, and affording more decision-making time.
The currently high financing cost of new subordinated debt for banks and heavy regulatory pressures on bank capitalisation, specifically what proportion of capital can be accounted for by tier one and what instruments will be eligible as tier one under the latest Basel III rules, would increase the volatility and uncertainty of the tier-one asset class. This remains a hard time for banks, and preserving their reputation would be aided precisely by taking those economically rational decisions including a non-call and designing an optimal and sustainable capital structure.
IlliquidX indentifies what it calls the tier-one axes of interest:
DB |
5.33 |
49 09/19/13 |
90.25 - 90.50 |
BACR |
4.875 |
49 12/15/14 |
84.75 - 85.00 |
UBS |
4.28 |
49 04/15/15 |
88.50 - 89.00 |
UCGIM |
4.028 |
49 10/27/15 |
77.00 - 77.50 |
ISPIM |
9.5 |
49 06/01/16 |
97.00 - 97.50 |
RZB |
5.169 |
49 05/16/16 |
77.00 - 78.00 |
DANBNK |
4.878 |
49 05/15/17 |
92.50 - 93.00 |
ISPIM |
8.047 |
49 06/20/18 |
95.25 - 95.75 |
ISPIM |
8.375 |
49 10/14/19 |
97.25 - 97.50 |
BACR |
4.75 |
49 03/15/20 |
69.00 - 69.00 |